10th October 2018

Written by Sam Goodman and Lucy Pether

The videogame industry has long grappled with the distinction between gaming and gambling, but recent debate over the use of “loot boxes” or “loot crates” has brought the issue into sharper focus.

Loot boxes allow players the chance to obtain additional in-game items, usually in exchange for real money purchases. Some contain items which improve in-game performance, whilst others are purely cosmetic. Generally speaking, the contents are randomly allocated and the chances of a player getting what they want are slim.

Loot boxes are primarily the result of the increasing need to monetise game content. The costs of developing games, especially big “AAA” titles, has increased exponentially over recent years. Whereas development costs of $1-20m were commonplace for sell-out games in the 2000s, games today frequently cost hundreds of millions, with GTA V famously costing around $265m. On top of that, modern day developers and publishers have to foot the bill for on-going costs which wouldn’t have blotted their balance sheets before. The trend towards online gaming means that servers, maintenance releases, technical support and network infrastructure costs have skyrocketed; and players’ expectations of added features and extended gameplay keep development costs high even after commercial release. In-game purchases, like loot boxes, provide on-going revenue streams to fund this new “games as a service” model.

However, the use of loot boxes has been particularly controversial due to their similarity to lotteries, sweepstakes and other restricted gambling activities (a comparison which is particularly sensitive given the potential for children to participate). Gambling rules in the UK, for example, identify the following three key factors which make up a simple lottery; all of which, on the face of it, appear to be identical to how loot boxes operate:

1.  people pay to participate;

2.  prizes are allocated to one or more members of a class; and

3.  prizes are allocated by a process which relies wholly on chance.

Yet loot boxes are currently not considered to fall foul of gambling legislation in the UK. In 2017, the Gambling Commission issued a statement which stated that “where in-game items obtained via loot boxes are confined for use within the game and cannot be cashed out it is unlikely to be caught as a licensable gambling activity”. The Commission clarified that position in early 2018 by saying that “where there are readily accessible opportunities to cash in or exchange those awarded in-game items for money or money’s worth, those elements of the game are likely to be considered licensable gambling activities.”

Further, whether or not loot boxes constitute gambling is a matter of national law, and their treatment varies from country to country, and in the US, from state to state. This lack of coherence presents problems for the videogames industry which invariably operates in a global, online economy.

China, for example, strictly prohibits gambling. In December 2016, it introduced rules to regulate loot boxes, requiring developers to reveal the odds of players receiving items.  Last year in Belgium, the gambling regulator launched an investigation into loot boxes, and lawmakers in Hawaii indicated that the practice should be scrutinised. The building criticism from around the globe culminated in controversy last year when EA suspended in-game transactions the day before the launch of Star Wars Battlefront 2.

Platforms and industry bodies have also responded to the debate. In December 2017, Apple changed its App Store Review Guidelines to require app developers to disclose the odds of winning items from loot boxes. In February 2018, the Entertainment Software Rating Board (ESRB) announced that it would introduce “in-game purchases” labels. These moves represent a shift towards tighter rules and enhanced scrutiny, but it remains to be seen whether national legislatures will take further action.

The debate doesn’t show signs of abating.

On 17 September 2018, the Gambling Commission was joined by 15 other regulators in issuing a joint statement relating to the “blurring of lines between gambling and gaming”. The regulators noted their increasing concern with “gambling themed content within video games”, particularly in relation to its availability to minors, and compared such content to online gambling. The declaration called for “common action” and “informed dialogue” in building a new regulatory framework.

In time, that “common action” may result in a clear position on loot boxes which is accepted in most jurisdictions. Until then the legal analysis, in the UK and abroad, is unclear, inconsistent and subject to regulatory change. Careful consideration will need to be given as to whether and how to incorporate loot boxes into games, and significant localisation efforts may be required to ensure that doing so is legal in all relevant jurisdictions.